Nolan principles & US and Sarbanes-Oxley Act 2002

Question 1

What are the 7 Nolan Principles?

Answer 1

The Nolan Principles are:

1. Honesty
2. Objectivity
3. Openness
4. Leadership
5. Accountability
6. Integrity
7. Selflessness

Question 2

What do the Nolan Principles relate to?

Answer 2

The Nolan principles relate to:

Public sector’ includes central/state/local government, state-run health and education services and other regulatory and advisory bodies. Public bodies are not profit making and are not accountable to shareholders. The Nolan Committee on Standards in Public Life was set up in 1995.

Question 3

Explain what we mean by Honesty in the Nolan Principles?

Answer 3

Honesty – duty to declare private interests and take steps to resolve any conflicts arising

Question 4

Explain what we mean by Objectivity in the Nolan Principles?

Answer 4

Objectivity – all decisions must be made on merit

Question 5

Explain what we mean by Openness in the Nolan Principles?

Answer 5

Openness – should be as open as possible about decisions, give reasons for decisions and only restrict information when public interest demands

Question 6

Explain what we mean by Leadership in the Nolan Principles?

Answer 6

Leadership – should promote and support these principles by leadership and example

Question 7

Explain what we mean by Accountability in the Nolan Principles?

Answer 7

Accountability – accountable for their decisions and submit themselves to whatever scrutiny is appropriate to their office

Question 8

Explain what we mean by Integrity in the Nolan Principles?

Answer 8

Integrity – not place themselves under any financial or other obligation that might influence them in the performance of their duties

Question 9

Explain what we mean by Selfishness in the Nolan Principles?

Answer 9

Selflessness – decisions taken solely in the public interest. They should not do so to gain financial benefits

Question 10

US and Sarbanes-Oxley Act 2002?

Answer 10

In 2017 the Investor Stewardship Group (ISG) published the Corporate Governance Framework for US Listed Companies containing 6 principles:

1. Boards are accountable to shareholders
2. Shareholders should be entitled to voting rights in proportion to their economic interest.
3. Board should be responsive to shareholders and be proactive in order to understand their perspectives.
4. Board should have a strong, independent leadership structure.
5. Board should adopt structures and practices that enhance their effectiveness.
6. Boards should develop management incentive structures that are aligned with the long-term strategy of the company

In 2017 the ISG also published the Stewardship Framework for Institutional Investors containing 6 principles which are very similar to those of the UK Stewardship Code.

Question 11

What is meant by a one tier/Unitary board?

Answer 11

Unitary boards such as the ones used in the UK, Neverland and Scandinavia have an executive management team who is managed by an executive board which consist of executives directors and non executive directors, supervising, and directors are all member of the same board and jointly form a single corporate body.

Question 12

What is meant by a two tier?

Answer 12

A two-tier board structures which is used in German and China consist of a supervisory board who has general oversight of the business, elected by shareholders and has employee representatives. The supervisory board is a management board who is responsible of the management of the company, consists of executive directors who are appointed by the supervisory board.

Question 13

Pros and cons of both a one and two tier system?

Answer 13

A two tier system has the involvement of non-executive directors:

since the executive and non-executive director form one corporate body in a one tier board structure, this may have a positive influence on the directors sense of shared responsibility. In a two tier system the non-executive director’s involvement in the business operations increases.

Information flow/process:

creating a single corporate body may simplify and accelerate the information process between daily management and supervision. However, a greater involvement of non-executive directors, may also involve a certain risk in such that the non-executive directors have greater involvement in the company’s state of affairs which may mean that they unable to operate independently.

Responsibility and liability:

being part of a single body means that the non-executive directors in principle have the same responsibility and liability as the executive directors. This may create more risk for them than for members of a separate supervisory board (e.g. liability in the event of bankruptcy).

Decision making process:

The decision making process is expected to be less time in a one tier system than in a two tier system which would require supervisory board approval.

Question 14

Criticism of a Supervisory Board?

Answer 14

Criticism of supervisory board is that they can be too big and awkward, they may not be independent, and questions arise over the competence of members, particularly of worker representatives.

Question 15

Difference between one-tier and two-tier board of directors?

Answer 15

Difference between one-tier and two-tier board of directors:

1. Composition:

The unitary board of directors is composed of executive directors (employees of the company) and non-executive directors (independent external directors). Both these directors sit on a single board. In a two-tier system, the supervisory board is directly elected by the shareholders and includes senior board members and/or employee representatives. The supervisory is responsible for the hiring and firing of the management board.

2. Segregation of roles:

In a one-tier or unitary board of management there is no clear separation of duties as both the executive and non-executive directors sit on the same board. While in a two-tier board, two different boards are present, with one clearly responsible for undertaking management roles and the other for the purposes of check and balance and policy making.

3. Decision-making:

The process of decision-making in a unitary board is faster because all the decisions are made and approved by a single board. Whereas, decisions made by the management board in a two-tier system have to be approved by the supervisory board for implementation which, therefore, can take time. This delay can prolong if the management and supervisory board disagree on a certain agenda.

4. Stakeholder Indulgence:

The composition of unitary board of directors does not allow for different kinds of stakeholder representation. This is because a single board cannot accommodate a large number of directors and therefore non-executive directors are the only independent input in a unitary board. However, in a two-tier system, as the management board and supervisory boards are different, it provides a chance to add representatives of more stakeholders especially representatives of employees.

5. Role of chairman and CEO:

In a one-tier board, the Chairman of board and the CEO (chief executive officer) sit on a single board. While in a two-tier board system, the supervisory board is led by the Chairman of the company and the management board is led by the CEO of the company.

6. Communication and supervision:

In a unitary board, the executives and non-executives sit on a single board. Therefore, all the decisions have an ongoing input of both of these directors. In this way, the non-executive directors who are primarily responsible for the supervision of executive directors can actively seek their duty. In a two-tier system as the two boards meet separately, the supervisory board cannot actively hold management board accountable and only gets the information which management board disseminates to them.